Menu

Category Archives: Tematica Investing

Weekly Issue: Among the Volatility, We See Several Thematic Confirming Data Points

Weekly Issue: Among the Volatility, We See Several Thematic Confirming Data Points

Key points inside this issue:

  • As expected, news of the day is the driver behind the stock market swings
  • Data points inside the September Retail Sales Report keep us thematically bullish on the shares of Amazon (AMZN), United Parcel Service (UPS) and Costco Wholesale. Our price targets remain $$2,250, $130 and $250, respectively.
  • We use the recent pullback to scale further into our Del Frisco’s Restaurant Group (DFRG) shares at better prices, our price target remains $14.
  • Netflix crushes subscriber growth in the September quarter; Our price target on Netflix (NFLX) shares remains $500.
  • September quarter earnings from Ericsson (ERIC) and Taiwan Semiconductor (TSM) paint a favorable picture from upcoming reports from Nokia (NOK) and AXT Inc. Our price targets on Nokia and AXT shares remain $8.50 and $11, respectively.
  • Walmart embraces our Digital Innovators investment theme
  • Programming note: Much commentary in this week’s issue centers on the September Retail Sales Report. On this week’s Cocktail Investing podcast, we do a deep dive on that report from a thematic perspective. 

 

As expected, news of the day is the driver behind the stock market swings

If there is one thing we can say about the domestic stock market over the last week, it remains volatile. While there are other words that one might use to describe the down, up, down move over the last week, but volatile is probably the most fitting. Last week I shared the market would likely trade based on the data of the day — economic, earnings or political — and that seems to have been the case. While we’ve received several solid earnings reports, including one from Thematic Leader Netflix (NFLX), several banks and even a few airlines, the headline economic data came up soft for September Retail Sales and Housing.

And then there was yesterday’s FOMC minutes from the Fed’s September monetary policy meeting, which showed that even though the Fed expects to remain on its tightening path, subject to the data to be had, several members of the committee see “a period where the Fed even will need to go beyond normalization of rates and into a more restrictive stance.”

Odds are we can expect further tweets from President Trump on this given his prior comments that the Fed is one of his greatest risks. I also expect this to reignite concerns for the current expansion, particularly since the Fed has historically done a good job hiking interest rates into a recession. From a thematic perspective, continued rate hikes by the Fed is likely to put some added pressure on Middle-Class Squeeze consumers. Before you freak out, let’s check the data. The economy is still growing, adding jobs, benefiting from lower taxes and regulation. It’s not about to fall off a cliff in the near term, but yes, the longer the current expansion goes, the greater the risk of something more than just a slower economy. More reasons to keep watching the monthly data.

Here’s the good news, inside that data and elsewhere we continue to receive confirming signals for our 10 investing themes as well as favorable data points for the Thematic Leaders and other positions on the Tematica Investing Select List.

 

Several positives in the September Retail Sales report for AMZN, UPS & COST

Cocktail Investing Podcast September Retail Sales Report

With the consumer directly or indirectly accounting for nearly two-thirds of the domestic economy and the average consumer spending 31% of his or her paycheck on retails goods, this monthly report is one worth monitoring closely.

Let’s take a closer look at this week’s September 2018 Retail Sales report. First, let’s talk about the headline miss that was making the rounds yesterday. Yes, the month over month comparison Total Retail & Food Services excluding motor vehicles & parts fell 0.1%, but Retail rose 0.4% on the same basis. The thing is, most tend to focus on those sequential comparisons, but as investors, we examine year over year comparisons when it comes to measuring revenue, profit and EPS growth. On that basis, Total Retail & Food Services rose 5.7% year over year while Retail climbed 4.4% compared to September 2017. That sounds pretty solid if you ask me. Now, let’s dig into the meat of the report and what it means for several of our thematic holdings.

Right off the bat, we can’t ignore the 11.4% year over year increase in gas station sales during September, which capped off a 17.2% increase for the September 2018 quarter. With such an increase owing to the rise in oil and gas prices, we would expect to see weakness in several of the retail sales categories as the cost of filling up the car saps spending at the margin and confirms our Middle-Class Squeeze investing theme. And we saw just that. Department stores once again fell in September vs. year ago levels as did Sporting goods, hobby, musical instrument, & bookstores. Given recent construction as well as housing starts data, the Building material & garden eq. & supplies dealer category posted slower year over year growth, which was hardly surprising.

Other than gas station sales, the other big gainer was Nonstore retailers – Census Bureau speak for e-tailers and digital commerce that are part of Digital Lifestyle investing theme,  which saw an 11.4% increase in September retail sales vs. year ago levels. That strong level clearly confirms our investment thesis that digital shopping continues to take consumer wallet share, which bodes well for our Amazon (AMZN), United Parcel Service (UPS), and to a lesser extent our Costco Wholesale (COST). With consumers feeling the pressure of our Middle-Class Squeeze investing theme, I continue to see them embracing the Digital Lifestyle to ferret out deals and bargains to stretch their after-tax spending dollars, especially as we head into the holiday shopping season.

Sticking with Costco, the company recently reported its U.S. same-store-sales grew 7.7% for September excluding fuel and currency. Further evidence that Costco also continues to gain consumer wallet share compared to retail and food sales establishments as well as the General Merchandise Store category.

  • Data points inside the September Retail Sales Report keep us thematically bullish on the shares of Amazon (AMZN), United Parcel Service (UPS) and Costco Wholesale. Our price targets remain $2,250, $130 and $250, respectively.

 

Scaling deeper into Del Frisco’s shares

Now let’s dig into the report as it relates to Del Frisco Restaurant Group, our Thematic Leader for the Living the Life investing theme. Per the Census Bureau, retail sales at food services & drinking places rose 7.1% year over year in September, which brought its year-over-year comparison for the September quarter to 8.8%. Clearly, consumers are spending more at restaurants, than eating at home. Paired with beef price deflation that has been confirmed by Darden Restaurants (DRI), this bodes well for profit growth at Del Frisco.

Against those data points, I’m using the blended 12.5% drop in DFRG shares since we added them to our holdings to improve our costs basis.

  • We are using the recent pullback to scale further into our Del Frisco’s Restaurant Group (DFRG) shares at better prices, our price target remains $14.

 

Netflix crushes subscriber growth in the September quarter

Tuesday night Netflix (NFLX) delivered a crushing blow to skeptics as it served up an EPS and net subscriber adds beat that blew away expectations and guided December quarter net subscriber adds above Wall Street’s forecast. This led NFLX shares to pop rather nicely, which was followed by a number of Wall Street firms reiterating their Buy ratings and price targets.

Were there some investors that were somewhat unhappy with the continued investment spend on content? Yes, and I suppose there always will be, but as we are seeing its that content that is driving subscriber growth and in order to drive net new adds outside the US, Netflix will continue to invest in content. As we saw in the company’s September quarter results, year to date international net subscriber adds is 276% ahead of those in the US. Not surprising, given the service’s launch in international markets over the last several quarters and corresponding content ramp for those markets.

Where the content spending becomes an issue is when its subscriber growth flatlines, which will likely to happen at some point, but for now, the company has more runway to go. I say that because the content spend so far in 2018 is lining its pipeline for 2019 and beyond. With its international paid customer base totaling 73.5 million users, viewed against the global non-US population, it has a way to go before it approaches the 45% penetration rate it has among US households.  This very much keeps Netflix as the Thematic Leader for our Digital Lifestyle investing theme.

One other thing, as part of this earnings report Netflix said it plans to move away from reporting how many subscribers had signed up for free trials during the quarter and focus on paid subscriber growth. I have to say I am in favor of this. It’s the paying subscribers that matter and will be the key to the stock until the day comes when Netflix embraces advertising revenue. I’m not saying it will, but that would be when “free” matters. For now, it’s all about subscriber growth, retention, and any new price increases.

That said, I am closely watching all the new streaming services that are coming to market. Two of the risks I see are a recreation of the cable TV experience and the creep higher in streaming bill totals that wipe out any cord-cutting savings. Longer-term I do see consolidation among this disparate services playing out repeating what we saw in the internet space following the dot.com bubble burst.

  • Our price target on Netflix (NFLX) shares remains $500.

 

What earnings from Ericsson and Taiwan Semiconductor mean for Nokia and AXT

This morning mobile infrastructure company Ericsson (ERIC) and Taiwan Semiconductor (TSM) did what they said was positive for our shares of Nokia (NOK) and AXT Inc. (AXTI).

In its earnings comments, Ericsson shared that mobile operators around the globe are preparing for 5G network launches as evidenced by the high level of field trials that are expected to last at such levels over the next 12-18 months. Ericsson also noted that North America continues to lead the way in terms of network launches, which confirms the rough timetable laid out by AT&T (T), Verizon (VZ) and even T-Mobile USA (TMUS) with China undergoing large 5G field trials as well. In sum, Ericsson described the 5G momentum as strong, which helped drive the company’s first quarter of organic growth since 3Q 2014. That’s an inflection point folks, especially since the rollout of these mobile technologies span years, not quarters.

Turning to Taiwan Semiconductor, the company delivered a top and bottom line beat relative to expectations. Its reported revenue rose just shy of 12% quarter over quarter (3.3% year over year) led by a 24% increase in Communication chip demand followed by a 6% increase in Industrial/Standard chips. In our view, this confirms the strong ramp associated with Apple’s (AAPL) new iPhone models as well as the number of other new smartphone models and connected devices slated to hit shelves in the back half of 2018. From a guidance perspective, TSM is forecasting December quarter revenue of $9.35-$9.45 billion is well below the consensus expectation of $9.8 billion, but before we rush to judgement, we need to understand how the company is accounting for currency vs. slowing demand. Given the seasonal March quarter slowdown for smartphone demand vs. the December quarter and the lead time for chips for those and other devices, we’d rather not rush to judgement until we have more pieces of data to round out the picture.

In sum, the above comments set up what should be positive September quarter earnings from Nokia and AXT in the coming days. Nokia will issue its quarterly results on Oct. 25, while AXT will do the same on Oct. 31. There will be other companies whose results as well as their revised guidance and reasons for those changes will be important signs posts for these two as well as our other holdings. As those data points hit, we’ll be sure to absorb that information and position ourselves accordingly.

  • September quarter earnings from Ericsson (ERIC) and Taiwan Semiconductor (TSM) paint a favorable picture from upcoming reports from Nokia (NOK) and AXT Inc. Our price targets on Nokia and AXT shares remain $8.50 and $11, respectively.

 

Walmart embraces our Digital Innovators investment theme

Yesterday Walmart (WMT) held its annual Investor Conference and while much was discussed, one of the things that jumped out to me was how the company is transforming  itself to operate in the “dynamic, omni-channel retail world of the future.” What the company is doing to reposition itself is embracing a number of aspects of our Disruptive Innovators investing theme, including artificial intelligence, robotics, inventory scanners, automated unloading in the store receiving dock, and digital price tags.

As it does this, Walmart is also making a number of nip and tuck acquisitions to improve its footing with consumers that span our Middle-Class Squeeze and in some instances our Living the Life investing theme as well our Digital Lifestyle one.  Recent acquisitions include lingerie company Bare Essentials and plus-sized clothing startup Eloquii. Other acquisitions over the last few quarters have been e-commerce platform Shoebuy, outdoor apparel retailer Moosejaw, women’s wear site Modcloth, direct-to-consumer premium menswear brand Bonobos, and last-mile delivery startup Parcel in September.

If you’re thinking that these moves sound very similar to ones that Amazon (AMZN) has made over the years, I would quickly agree. The question percolating in my brain is how does this technology spending stack up against expectations and did management boost its IT spending forecast for the coming year? As that answer becomes clear, I’ll have some decisions to make about WMT shares and if we should be buyers as we move into the holiday shopping season.

 

Special Alert – Our battle plan for the next few weeks

Special Alert – Our battle plan for the next few weeks

To say the last several days have been the roughest in recent memory is somewhat of an understatement. This is what happens when we have a wide swing in investor sentiment due to a confluence of concerns. We’ve talked about them over the last several weeks —  from signs of a slowing US economy to the impact of rising Treasury yields; growing signs of inflation that is questioning the Fed’s velocity of rate hikes, what that may mean for both consumer and corporate borrowings, and subsequent spending; more pain at the gas pump to what looks to be even more escalation in tariffs between the US and China, and Italy-Eurozone concerns – and they are coming home to roost just as we step into the meaty part of the September quarter earnings season.

The question that is likely crossing most investors’ mind is “What will all of this mean when companies issue their outlooks for the December quarter in the coming days and weeks?”

The concern that I’ve voiced is these factors — such as rising input costs and higher freight costs — are likely to lead companies to issue more cautious guidance than the market had been expecting, which called for more than 20% EPS growth year over year in the December quarter. As investors put pencil to paper (or these days, fingers to keys working Excel spreadsheets), they will be adjusting forecasts as comments on demand, input costs and interest costs are had.

We are seeing this weigh on stocks almost across the board, but especially on those like Facebook (FB), Apple (AAPL), Netflix (NFLX) and Alphabet (GOOGL), better known as the FANG stocks, and other high-flying growth stocks like them. Compounding matters is the fact that we are in the blackout period for stock buyback programs, which means companies are not able to step in and repurchase shares, which tends to add some support to stock prices. Also, not helping is the modest level of cash on the sidelines of institutional investors, which stood at 5.1% in September according to the most recent Bank of America Merrill Lynch’s monthly fund manager survey.

The sharp selloff of the last few days has stoked investor fears, marked by the CNN Money Fear & Greed Index hitting 8 (Extreme Fear) vs. 56 (Greed) a month ago. When we see such pronounced shifts to the negative with investor behavior more often than not we get a “shoot first, ask questions later.” Fun times, and yes that was sarcasm.

To sum up, we have a number of concerns hitting the market that is causing investors to question prior expectations at a time when backstops to falling share prices are limited. Odds are this is going to play out over at least the next several days as corporate earnings get hot and heavy, and the market trades on the next economic data point. Today we say the domestic stock market futures recover on a tame relative to expectations September CPI report, but yesterday’s September PPI report that once again showed core PPI prices were up 2.9% year over year fueled the Wednesday selloff.

 

What’s Our Thematic Strategy?

For now, our strategy will be to sit on the sidelines building our shopping list and listening to a wide swath of corporate earnings as well as new thematic data points to update our investing mosaic as we wait for less turbulent waters. This also means looking for opportunistic price points to improve our positions on both the Thematic Leaders as well as the Select List. I’ll continue to focus on those companies that are riding the might of thematic tailwinds, asking questions like “Where will the company’s business be in 12-18 months as these tailwinds and its own maneuverings play out?”

A great example is Amazon (AMZN), which as you know continues to benefit from the Digital Lifestyle investment theme primarily and the shift to digital shopping, as well as cloud adoption, which is part of our Digital Infrastructure theme. And before too long, Amazon will own online pharmacy PillPack and become a key player in our Aging of the Population theme. Amid the market selloff, however, the company continues to improve its thematic position. First, a home insurance partnership with insurance company Travelers (TRV) should help spur sales of Amazon Echo speakers and security devices. This follows a similar partnering with ADT (ADT), and both arrangements mean Amazon is indeed focused on improving its position in our Safety & Security investing theme. Second, Bloomberg is reporting that Amazon Web Services has inked a total of $1 billion in new cloud deals with SAP (SAP) and Symantec (SYMC). That’s a hefty shot in the arm for the Amazon business that is a central part of our Digital Infrastructure theme and is one that delivered revenue of $6.1 billion and roughly half of the Amazon’s overall profits in the June 2018 quarter.

At almost the same time, Alphabet/Google (GOOGL) announced it has dropped out of the bidding for the $10 billion cloud computing contract with the Department of Defense. Google cited concerns over the use of Artificial Intelligence as well as certain aspects of the contract being out of the scope of its current government certifications. This move likely cements the view that Amazon Web Services is the front-runner for the Joint Enterprise Defense Infrastructure cloud (JEDI), but we can’t rule our Microsoft or others as yet. I’ll continue to monitor these developments in the coming days and weeks, but winning that contract would mean Wall Street will have to adjust its expectations for one of Amazon’s most profitable businesses higher.

Those are a number of positives for Amazon that will play out not in the next few days but in the coming 12-18+ months. It’s those kinds of signals that I’ll be focused on even more so in the coming days and weeks.

Tomorrow we will see several banks report their September quarter results, and they will offer ample insight into not only the economy and demand for capital but default rates and other warning indicators. Odds are they will also share their views on interest rates and prospects for forthcoming action by the Fed. As I digest those insights, I’ll also be reading Tematica Research’s ® Chief Macro Strategist Lenore Hawkins’ latest global macro thoughts and market insights. If I think it’s a must read, my suggestion is you should be reading it as well. Also, on this week’s podcast, which will be published shortly, Lenore and I talk about all of this so if you’re looking for a more in-depth discussion and a few laughs along the way, I’d recommend you check it out.

 

Weekly Issue: Adding to BABA and DRFG

Weekly Issue: Adding to BABA and DRFG

 

Key points in this issue:

  • The market hits new records, but the corporate warnings are growing
  • We are using the recent fall-off in both Rise of the New Middle-Class investment theme company Alibaba (BABA) and Guilty Pleasure theme company Del Frisco’s (DRFG) to scale into both positions. Our price targets remain $230 and $14, respectively.
  • We’re putting some perspective around the National Retail Federation’s 2018 Holiday Shopping forecast that was published yesterday.
  • As more holiday shopping forecasts emerge, and we progress through the upcoming earnings season I plan on revisiting our current $2,250 price target for Amazon (AMZN) shares. More details on the pending acquisition of PillPack are also a catalyst for us, as well as Wall Street, to boost that target.
  • Heading into the holiday shopping season, our price target on UPS shares remains $130.
  • We continue to see Costco Wholesale (COST) a prime beneficiary of the Middle-class Squeeze. Our price target on the shares remains $250.
  • What to watch in tomorrow’s September Employment Report? Wage growth.

 

The market hits new records, but the corporate warnings are growing

While we’ve seen new records for the stock market indices this week, we’ve also seen the S&P 500 little changed amid fresh September data that in aggregate points to a solid US economy. This week we received some favorable September economic news in the form of the ADP Employment Report as well as the ISM Services Index with both crushing expectations. Despite these reports, the S&P 500 has barely budged this week, which suggests to me investors are expecting a sloppy September quarter earnings season. No doubt there will be some bright spots, but in aggregate we are seeing a number of headwinds compared to this time last year that could weigh on corporate outlooks.

Already we’ve had a number of companies issuing softer than expected outlooks due to rising input and transportation costs, trade and tariffs, political wrangling ahead of the upcoming mid-term elections, renewed concerns over Italy and the eurozone, and the slower speed of the economy compared to the June quarter. A great example of that was had yesterday when shares of lighting and building management company Acuity Brands (AYI) fell more than 13% after it reported fiscal fourth-quarter profit that beat expectations, but margins fell amid a sharp rise in input costs. The company said costs were “well higher” for items such as electronic components, freight, wages, and certain commodity-related items, such as steel, due to “several economic factors, including previously announced and enacted tariffs and wage inflation due to the tight labor market…”

Acuity is not the first company to report this and odds are it will not be the last one as September quarter earnings begin to heat up next week. As the velocity of reports picks up, we could be in for a bumpy ride as investors reset their growth and profit expectations for the December quarter and 2019.  The good news is we are our eyes are wide open and we will be prepared to use any meaningful moves lower to scale into our Thematic Leader positions or other positions on the Select List provided our investment thesis remains intact. Pretty much what we’re doing this morning with Alibaba (BABA) and Del Frisco’s Restaurant (DFRG) shares. As I watch the earnings maelstrom unfold, I’ll also be keeping an eye on inflation-related comments to determine if the Fed might be falling behind the interest rate hike curve.

 

Adding to our Alibaba and Del Frisco Restaurant Thematic Leader Positions

This morning we are putting some capital to work, scaling into and improving the respective cost basis for Alibaba (BABA) and Del Frisco’s Restaurant Group (DFRG), the Rise of the New Middle-Class and Guilty Pleasure Thematic Leader holdings.

Earlier this week, the administration inked a trade deal between the US-Mexico-Canada that has some incremental benefits, not yuuuuuuuge ones. But in the administration’s view, a win is a win and with that odds are the Trump administration will focus on making some progress with China trade talks. Per the recent Business Roundtable survey findings

As that happens we should see some of that overhang on BABA shares begin to fade, allowing the factors behind our original thesis to shine through. Before too long, we’ll be on the cusp of the upcoming Chinese New Year, the largest gift-giving holiday in the country, and as know from our own holiday shopping here in the US, consumer spending picks up ahead of the actual holiday.

We’re also seeing Wall Street turn more bullish on BABA shares – yesterday, they received a price target upgrade to $247 from $241 at Goldman Sachs that in its view reflects Alibaba’s expanding total addressable market with continued growth in its cloud business. We view this as more people coming around to our way of thinking on Alibaba’s business model, which closely resembles that of Amazon (AMZN) from several years ago. In short, the accelerating adoption of Alibaba’s digital platform along with the same for its cloud, streaming and mobile payment services should expand margins at the core shopping business and propel its other businesses into the black. Again, just like we’ve seen at Amazon and that has propelled the shares meaningfully higher.

Could we be early with BABA? Yes, but better to be early and patient than late is my thinking.

  • We will use the pullback in Alibaba (BABA) shares to improve our cost basis in this Rise of the New Middle-class position. Our price target on Alibaba shares remains $230.

 

Turning to Del Frisco’s, we have fresh signs that beef prices will trend lower over the next few years as beef production begins to climb. In the recently released Baseline Update for U.S. Agricultural Markets, projections through 2023, the Food and Agricultural Policy Institute (FAPRI) at the University of Missouri estimated the average price of a 600-to 650-pound feeder steer (basis Oklahoma City) at $158.51 per hundredweight (cwt) this year, and then declining to as low as $141.06 in 2020.

As a reminder, beef prices are the biggest impact on the company’s margin profile, and falling beef prices bode extremely well for better profits ahead. Even if we see a fickle consumer emerge, which is possible, but in my view has a low probability of happening given the increase in Consumer Confidence levels, especially for the expectation component, those falling beef prices should cushion the blow.

  • We are adding to our position in Guilty Pleasure company Del Frisco’s (DFRG), which at current levels will improve our cost basis. Our price target remains $14.

 

The NRF introduces its 2018 Holiday Shopping Forecast

Yesterday, the National Retail Federation published its 2018 holiday retail sales forecast, which covers the November and December time frame and excludes automobiles, gasoline, and restaurants sales. On that basis, the NRF expects an increase between 4.3%-$4.8% over 2017 for a total of $717.45- $720.89 billion. I’d note that while the NRF tried to put a sunny outlook on that forecast by saying it compares to “an average annual increase of 3.9% over the past five years” what it did not say is its 2018 forecast calls for slower growth compared to last year’s holiday shopping increase of 5.3%.

That could be some conservatism on their part or it could reflect their concerns over gas prices and other aspects of inflation as well as higher interest costs vs. a year ago that could sap consumer buying power this holiday season. Last October the NRF expected 2017 holiday sales to grow 3.6%-4.0% year over year, well short of the 5.3% gain that was recorded so it is possible they are once again underestimating the extent to which consumers will open their wallets this holiday season. And if you’re thinking about the chart on Consumer Confidence above and what I said in regard to our adding more DFRG shares, so am I.

While I am bullish, we can’t rule out there are consumer-facing headwinds on the rise, and that is likely to accelerate the shift to digital shopping this holiday season, especially as more retailers prime the digital sales pump. As Tematica’s Chief Macro Strategist, Lenore Hawkins, is fond of saying – Amazon is the deflationary Death Star, which to me supports the notion that consumers, especially those caught in our Middle-class Squeeze investing theme, will use digital shopping to offset any pinch they are feeling at the gas pump. It also means saving some dollars by not going to the mall – a double benefit if you ask me, and that’s before we even get to the time spent at the mall.

On its own Amazon would be a natural beneficiary of the seasonal pick up in shopping, but as I’ve shared before it has been not so quietly growing its private label businesses and staking out its place in the fashion and apparel industry. These moves as well as Amazon’s ability to competitively price product, plus the myriad way it makes money off its listed products and the companies behind them, mean we are entering into what should be a very profitable time of year for Amazon and its shareholders.

  • As more holiday shopping forecasts emerge, and we progress through the upcoming earnings season I plan on revisiting our current $2,250 price target for Amazon (AMZN) shares. More details on the pending acquisition of PillPack are also a catalyst for us, as well as Wall Street, to boost that target.

I’ve long said that United Parcel Service (UPS) shares are a natural beneficiary of the shift to digital shopping. With a seasonal pickup once again expected that has more companies offering digital shopping and more consumers shopping that way, odds are package volumes will once again outpace overall holiday shopping growth year over year. From a financial perspective, that means a disproportionate share of revenue and earnings are to be had at UPS, and from an investor’s perspective, that means multiple expansion is likely to be had.

  • As we head into the holiday shopping season, our price target on UPS shares remains $130.

 

Coming up – Costco earnings and the September Employment Report

After tonight’s market close, Middle-class Squeeze company Costco Wholesale (COST) will issue its latest quarterly results. Given the monthly reports that it issues, which has seen clear consumer wallet share gains in recent months and confirmed the brisk pace of new warehouse openings, we should see results tonight. As you are probably thinking, and correctly so, we are entering one of the strongest periods of the year for Costco, and that means watching not only its outlook, relative to the holiday shopping forecast we discussed above, but its membership comments and new warehouse location plans ahead of Black Friday. Two other factors to watch will be its comments on beef prices – the company is one of the largest sellers of beef in the world – and where it is seeing inflation forces at work.

In terms of consensus expectations for the quarter to be reported, Wall Street sees Costco serving up EPS of $2.36, up more than 13% year over year, on revenue of $44.27 billion, up 4.7% from the year ago quarter.

  • We continue to see Costco Wholesale (COST) a prime beneficiary of the Middle-class Squeeze. Our price target on the shares remains $250.

 

Tomorrow’s September Employment Report will cap the data filled week off. Following the blowout September ADP Employment Report, expectations for tomorrow’s report have inched up. While the number of jobs created is something to watch, the two key factors that I’ll be watching will be the payroll to population figure and wage data. The former will clue us into if we are seeing a greater portion of the US population working, while any meaningful movement in the latter will be fuel for inflation hawks. If the report’s figures for job creation and wage gains come in hotter than expected, we very well could see good news be viewed as concerning as investors connect the dots that call for potentially greater rate hike action by the Fed.

Let’s see what the report brings, and Lenore will no doubt touch on it as part of her next missive.

 

WEEKLY ISSUE: Confirming Data Points for Apple and Universal Display

WEEKLY ISSUE: Confirming Data Points for Apple and Universal Display

Key points inside this issue:

  • The Business Roundtable and recent data suggest trade worries are growing.
  • Our price target on Costco Wholesale (COST) shares remains $250.
  • Our price target on Apple (AAPL) and Universal Display (OLED) shares remain $225 and $150, respectively.
  • Changes afoot at S&P, but they still lag our thematic investing approach

 

While investors and the stock market have largely shaken off concerns of a trade war thus far, this week the stakes moved higher. The U.S. initiated the second leg of its tariffs on China, slapping on $200 billion of tariffs on Chinese imports of food ingredients, auto parts, art, chemicals, paper products, apparel, refrigerators, air conditioners, toys, furniture, handbags, and electronics.

China responded, not only by canceling expected trade talks, but by also implementing tariffs of its own to the tune of $60 billion on U.S. exports to China. Those tariffs include medium-sized aircraft, metals, tires, golf clubs, crude oil and liquified natural gas (LNG). Factoring in those latest steps, there are tariffs on nearly half of all U.S. imports from China and over 50% of U.S. export to China.

Should President Trump take the next stated step and put tariffs on an additional $267 billion of products, it would basically cover all U.S. imports from China. In terms of timing, let’s remember that we have the U.S. mid-term elections coming up before too long — and one risk we see here at Tematica is China holding off trade talks until after those elections.

On Monday, the latest Business Roundtable survey found that two-thirds of chief executives believed recent tariffs and future trade tension would have a negative impact on their capital investment decisions over the next six months. Roughly one-third expected no impact on their business, while only 2% forecast a positive effect.

That news echoed the recent September Flash U.S. PMI reading from IHS Markit, which included the following commentary:

“The escalation of trade wars, and the accompanying rise in prices, contributed to a darkening of the outlook, with business expectations for the year ahead dropping sharply during the month. While business activity may rebound after the storms, the drop in optimism suggests the longer term outlook has deteriorated, at least in the sense that growth may have peaked.”

Also found in the IHS Markit report:

“Manufacturers widely noted that trade tariffs had led to higher prices for metals and encouraged the forward purchasing of materials… Future expectations meanwhile fell to the lowest so far in 2018, and the second-lowest in over two years, as optimism deteriorated in both the manufacturing and service sectors.”

As if those growing worries weren’t enough, there has been a continued rise in oil prices as OPEC ruled out any immediate increase in production, the latest round of political intrigue inside the Washington Beltway, the growing spending struggle for the coming Italian government budget and Brexit.

Any of these on their own could lead to a reversal in the CNN Money Fear & Greed Index, which has been hanging out in “Greed” territory for the better part of the last month. Taken together, though, it could lead companies to be conservative in terms of guidance in the soon-to-arrive September quarter earnings season, despite the benefits of tax reform on their businesses and on consumer wallets. In other words, these mounting headwinds could weigh on stocks and lead investors to question growth expectations for the fourth quarter.

What’s more, even though S&P 500 EPS expectations still call for 22% EPS growth in 2018 vs. 2017, we’ve started to see some downward revisions in projections for the September and December quarters, which have softened 2018 EPS estimates to $162.01, down from $162.60 several weeks ago. Not a huge drop, but when looking at the current stock market valuation of 18x expected 2018 EPS, remember those expectations hinge on the S&P 500 group of companies growing their EPS more than 21% year over year in the second half of 2018.

 

Any and all of the above factors could weigh on corporate guidance or just rattle investor’s nerves and likely means a bumpy ride over the ensuing weeks as trade and political headlines heat up. As it stands right now, according to data tabulated from FactSet, heading into September quarter earnings, 74 of 98 companies in the S&P 500 that issued guidance, issued negative guidance marking the highest percentage (76%) since 1Q 2016 and compares to the five year average of 71%.

Not alarmingly high, but still higher than the norm, which means I’ll be paying even closer than usual attention to what is said over the coming weeks ahead of the “official” start to September quarter earnings that is Alcoa’s (AA) results on Oct. 17 and what it means for both the Thematic Leaders and the other positions on the Select List.

 

Today is Fed Day

This afternoon the Fed’s FOMC will break from its September meeting, and it is widely expected to boost interest rates. No surprise there, but given what we’ve seen on the trade front and in hard economic data of late, my attention will be on what is said during the post-meeting press conference and what’s contained in the Fed’s updated economic forecast. The big risk I see in the coming months on the Fed front is should the escalating tariff situation lead to a pick-up in inflation, the Fed could feel it is behind the interest rate hike curve leading to not only a more hawkish tone but a quicker pace of rate hikes than is currently expected.

We here at Tematica have talked quite a bit over consumer debt levels and the recent climb in both oil and gas prices is likely putting some extra squeeze on consumers, especially those that fall into our Middle-Class Squeeze investing theme. Any pick up in Fed rate hikes means higher interest costs for consumers, taking a bigger bite out of disposable income, which means a step up in their effort to stretch spending dollars. Despite its recent sell-off, I continue to see Costco Wholesale (COST) as extremely well positioned to grab more share of those cash-strapped wallets, particularly as it continues to open new warehouse locations.

  • Our price target on Costco Wholesale (COST) shares remains $250.

 

Favorable Apple and Universal Display News

Outside of those positions, we’d note some favorable news for our Apple (AAPL) shares in the last 24 hours. First, the iPhone XS Max OLED display has reclaimed the “Best Smartphone Display” crown for Apple, which in our view augurs well for other smartphone vendors adopting the technology. This is also a good thing for our Universal Display (OLED) shares as organic light emitting diode displays are present in two-thirds of the new iPhone offerings. In addition to Apple and other smartphone vendors adopting the technology, we are also seeing more TV models adoption it as well. We are also starting to see ultra high-end cars include the technology, which means we are at the beginning of a long adoption road into the automotive lighting market. We see this confirming Universal’s view that demand for the technology and its chemicals bottomed during the June quarter. As a reminder, that view includes 2018 revenue guidance of $280 million-$310 million vs. the $99.7 million recorded in the first half of the year.

Second, Apple has partnered with Salesforce (CRM) as part of the latest step in Apple’s move to leverage the iPhone and iPad in the enterprise market. Other partners for this strategy include IBM (IBM), Cisco Systems (CSCO), Accenture (ACN) CDW Corp. (CDW) and Deloitte. I see this as Apple continuing to chip away at the enterprise market, one that it historically has had limited exposure.

  • Our price target on Apple (AAPL) and Universal Display (OLED) shares remain $225 and $150, respectively.

 

Changes afoot at S&P, but they still lag our thematic investing approach

Before we close out this week’s issue, I wanted to address something big that is happening in markets that I suspect most individuals have not focused on. This week, S&P will roll out the largest revision to its Global Industry Classification Standard (GICS) since 1999. Before we dismiss it as yet another piece of Wall Street lingo, it’s important to know that GICS is widely used by portfolio managers and investors to classify companies across 11 sectors. With the inclusion of a new category – Communication Services – it means big changes that can alter an investor’s holdings in a mutual fund or ETF that tracks one of several indices. That shifting of trillions of dollars makes it a pretty big deal on a number of fronts, but it also confirms the shortcomings associated with sector-based investing that we here at Tematica have been calling out for quite some time.

The new GICS category, Communications Services, will replace the Telecom Sector category and include companies that are seen as providing platforms for communication. It will also include companies in the Consumer Discretionary Sector that have been classified in the Media and Internet & Direct Marketing Retail subindustries and some companies from the Information Technology sector. According to S&P, 16 Consumer Discretionary stocks (22% of the sector) will be reclassified as Communications Services as will 7 Information Technology stocks (20% of that sector) as will AT&T (T), Verizon (VZ) and CenturyLink (CTL). Other companies that are folded in include Apple (AAPL), Google (GOOGL), Disney (DIS), Twitter (TWTR), Snap (SNAP), Netflix (NFLX), Comcast (CMCSA), and DISH Network (DISH) among others.

After these maneuverings are complete, it’s estimated Communication services will be the largest category in the S&P 500 at around 10% of the index leaving weightings for the other 11 sectors in a very different place compared to their history. In other words, some 50 companies are moving into this category and out of others. That will have meaningful implications for mutual funds and ETFs that track these various index components and could lead to some extra volatility as investors and management companies make their adjustments. For example, the Technology Select Sector SPDR ETF (XLK), which tracks the S&P Technology Select Sector Index, contained 10 companies among its 74 holdings that are being rechristened as part of Communications Services. It so happens that XLK is one of the two largest sector funds by assets under management – the other one is the Consumer Discretionary Select Sector SPDR Fund (XLY), which had exposure to 16 companies that are moving into Communications Services.

So what are these moves really trying to accomplish?

The simple answer is they taking an out-of-date classification system of 11 sectors – and are attempting to make them more relevant to changes and developments that have occurred over the last 20 years. For example:

  • Was Apple a smartphone company 20 years ago? No.
  • Did Netflix exist 20 years ago? No.
  • Did Amazon have Amazon Prime Video let alone Amazon Prime 20 year ago? No.
  • Was Facebook around back then? Nope. Should it have been in Consumer Discretionary, to begin with alongside McDonald’s (MCD) and Ralph Lauren (RL)? Certainly not.
  • Did Verizon even consider owning Yahoo or AOL in 1999? Probably not.

 

What we’ve seen with these companies and others has been a morphing of their business models as the various economic, technological, psychographic, demographic and other landscapes around them have changed. It’s what they should be doing, and is the basis for our thematic investment approach — the strong companies will adapt to these evolving tailwinds, while others will sadly fall by the wayside.

These changes, however, expose the shortcomings of sector-based investing. Simply viewing the market through a sector lens fails to capture the real world tailwinds and catalysts that are driving structural changes inside industries, forcing companies to adapt. That’s far better captured in thematic investing, which focuses on those changing landscapes and the tailwinds as well as headwinds that arise and are driving not just sales but operating profit inside of companies.

For example, under the new schema, Microsoft (MSFT) will be in the Communications Services category, but the vast majority of its sales and profits are derived from Office. While Disney owns ESPN and is embarking on its own streaming services, both are far from generating the lion’s share of sales and profits. This likely means their movement into Communications Services is cosmetic in nature and could be premature. This echoes recent concern over the recent changes in the S&P 500 and S&P 100 indices, which have been criticized as S&P trying to make them more relevant than actually reflecting their stated investment strategy. For the S&P 500 that is being a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies by market value.

As much as we could find fault with the changes, we can’t help it if those institutions, at their core, stick to their outdated thinking. As I have said before about other companies, change is difficult and takes time. And to be fair, for what they do, S&P is good at it, which is why we use them to calculate the NJCU New Jersey 50 Index as part of my work New Jersey City University.

Is this reclassification to update GICS and corresponding indices a step in the right direction?

It is, but it is more like a half step or even a quarter step. There is far more work to be done to make GICS as relevant as it needs to be, not just in today’s world, but the one we are moving into. For that, I’ll continue to stick with our thematic lens-based approach.

 

Introducing The Thematic Leaders

Introducing The Thematic Leaders

 

Several weeks ago began the arduous task of recasting our investment themes, shrinking them down to 10 from the prior 17 in the process. This has resulted in a more streamlined and cohesive investment mosaic. As part of that recasting, we’ve also established a full complement of thematic positions, adding ones, such as Chipotle Mexican Grill (CMG) and Altria (MO) in themes that have been underrepresented on the Select List. The result is a stronghold of thematic positions with each crystalizing and embodying their respective thematic tailwinds.

This culmination of these efforts is leading us to christen those 10 new Buy or rechristened Buy positions as what are calling The Thematic Leaders:

  1. Aging of the Population – AMN Healthcare (AMN)
  2. Clean Living – Chipotle Mexican Grill (CMG)
  3. Digital Lifestyle – Netflix (NFLX)
  4. Digital Infrastructure –  Dycom Industries (DY)
  5. Disruptive Innovators – Universal Display (OLED)
  6. Guilty Pleasure – Altria (MO)
  7. Living the Life – Del Frisco’s Restaurant Group (DFRG)
  8. Middle-Class Squeeze – Costco Wholesale (COST)
  9. Rise of the New Middle-Class – Alibaba (BABA)
  10. Safety & Security – Axon Enterprises (AAXN)

 

By now you’ve probably heard me or Tematica’s Chief Macro Strategist Lenore Hawkins mention how Amazon (AMZN) is the poster child of thematic investing given that it touches on nearly all of the 10 investing themes. That’s true, and that is why we are adding Amazon to the Thematic Leaders in the 11th slot. Not quite a baker’s dozen, but 11 strong thematic positions.

One question that you’ll likely have, and it’s a logical and fare one, is what does this mean for the Select List?

We wouldn’t give up on companies like Apple (AAPL), Alphabet (GOOGL), Disney (DIS), McCormick & Co. (MKC) and several other well-positioned thematic businesses that are on the Select List. So, we are keeping both with the Thematic Leaders as the ones that offer the most compelling risk-to-reward tradeoff and the greater benefit from the thematic tailwinds. When we have to make an adjustment to the list of Thematic Leaders, a company may be moved to the Select List in a move that resembles a move to a Hold from a Buy as it is replaced with a company that offers better thematic prospects and share price appreciation. Unlike Wall Street research, however, our Hold means keeping the position in intact to capture any and all additional upside.

Another way to look at it, is if asked today, which are the best thematically positioned stocks to buy today, we’d point to the Thematic Leaders list, while the Select List includes those companies that still have strong tailwinds behind their business model but for one reason or another might not be where we’d deploy additional capital. A great example is Netflix vs. Apple, both are riding the Digital Lifestyle tailwind, but at the current share price, Netflix offers far greater upside than Apple shares, which are hovering near our $225 price target.

After Apple’s Apple Watch and iPhone event last week, which in several respects underwhelmed relative to expectations despite setting up an iPhone portfolio at various price points, odds are the iPhone upgrade cycle won’t accelerate until the one for 5G. The question is will that be in 2019 or 2020? Given that 5G networks will begin next year, odds are we only see modest 5G smartphone volumes industry-wide in 2019 with accelerating volumes in 2020. Given Apple’s history, it likely means we should expect a 5G iPhone in 2020. Between now and then there are several looming positives, including its growing Services business and the much discussed but yet to be formally announced streaming video business. I continue to suspect the latter will be subscription based.  That timing fits with our long-term investing style, and as I’ve said before, we’re patient investors so I see no need to jettison AAPL shares at this time.

The bottom line is given the upside to be had, Netflix shares are on the Thematic Leaders list, while Apple shares remain on the Select List. The incremental adoption by Apple of the organic light emitting diode display technology in two of its three new iPhone models bodes rather well for shares of Universal Display (OLED), which have a $150 price target.

Other questions…

Will we revisit companies on the Select List? Absolutely. As we are seeing with Apple’s Services business as well as moves by companies like PepsiCo (PEP) and Coca-Cola (KO) that are tapping acquisitions to ride our Clean Living investing tailwind, businesses can morph over time. In some cases, it means the addition of a thematic tailwind or two can jumpstart a company’s business, while in other cases, like with Disney’s pending launch of its own streaming service, it can lead to a makeover in how investors should value its business(es).

Will companies fall off the Select List?

Sadly, yes, it will happen from time to time. When that does happen it will be due to changes in the company’s business such that its no longer riding a thematic tailwind or other circumstances emerge that make the risk to reward tradeoff untenable. One such example was had when we removed shares of Digital Infrastructure company USA Technologies (USAT) from the Select List to the uncertainties that could arise from a Board investigation into the company’s accounting practices and missed 10-K filing date.

For the full list of both the Thematic Leaders and the Select List, click here

To recap, I see this as an evolution of what we’ve been doing that more fully reflects the power of all of our investing themes. In many ways, we’re just getting started and this is the next step…. Hang on, I think you’ll love the ride as team Tematica and I continue to bring insight through our Thematic Signals, our Cocktail Investing podcast and Lenore’s Weekly Wrap.

 

 

Adding more Del Frisco’s to our plate following several bullish data points

Adding more Del Frisco’s to our plate following several bullish data points

Key points inside this issue

  • We are scaling into shares of Del Frisco’s Restaurant Group (DFRG) following several bullish data points from last week. Our price target for DFRG shares remains $14.
  • Our price target on Amazon (AMZN) remains $2,250
  • Our price target on United Parcel Service (UPS) shares remains $130
  • Our price target on Chipotle Mexican Grill (CMG) shares remains $550
  • Our price target on Costco Wholesale (COST) remains $250
  • I am reviewing our current price target of $130 for shares of McCormick & Co.
  • Last week’s podcast – Lithium Ion Batteries: The Enabler of the Digital Lifestyle
  • Last week’s Thematic Signals

Last Friday we received a number of positive data points for restaurant spending, which coupled with the latest US Department of Agriculture report on falling beef prices has me using the recent weakness in our Del Frisco’s Restaurant Group (DFRG) shares to improve our cost basis. Since adding DFRG shares to the portfolio, they’ve fallen nearly 10% since the end of August and just over 3% since we added them to our holdings despite favorable economic and industry reports. Part of that downward pressure came from Stephens throwing in the towel on its bullish stance on the shares last Wednesday. It would appear that Stephens jumped the gun given the favorable data that emerged later in the week.

Let’s review all of those data points…

 

August Retail Sales

The August Retail Sales report saw its headline figure come in at +0.1% month over month missing expectations of +0.4% and marked the slowest gain since February suggesting persistently high gas prices could be taking a bite out of consumer spending. With prospects for higher gas prices ahead following last week’s greater than expected crude inventory drawdown reported by the Department of Energy and the greater than expected jump in Total Consumer Credit for January, it would appear that Middle-Class Squeeze consumers slowed their spending in August vs. July. Hat tip to Tematica’s Chief Macro Strategist, Lenore Hawkins, and her coverage of those data points in last Friday’s Weekly Wrap. If I’m reading it, so should you.

Turning to the year over year view, August retail sales rose 6.2%, led by a more than 20% increase in gas station sales due to the aforementioned gas prices, and continued gains in Nonstore retailers (+10.4%) and food services & drinking places (+10.1%). Over the last three months, these last two categories are up 9.9% and 9.5% year over year, even as gas station sales are up nearly 21% by comparison. Those figures bode extremely well for our Digital Lifestyle positions in Amazon (AMZN) and United Parcel Service (UPS), our Clean Living holding that is Chipotle Mexican Grill (CMG) and Del Frisco’s Restaurant Group, a Living the Life company.

The report also offered confirming context for our shares in Costco Wholesale (COST) as its August same-store sales handily beat those contained in the August Retail Sales report. Also inside this latest missive from the U.S. Department of Commerce, grocery store sales rose 4.3% year over year in August, which keeps me bullish on our shares of McCormick & Co. (MKC) even as they hover over our current $130 price target.

In terms of areas reporting declines in August Retail Sales Report, we continue to see pressure at Sporting goods, hobby, musical instrument, & bookstores (-3.9%) and Department Stores (-0.7%), continuing the trend of the last few months. With Amazon continuing to flex its business model as well as its own line of private label products, including fashion, sportswear, and apparel, as well as continued digital commerce gains at Walmart (WMT) and its Bonobos brand, we see these retail categories remaining challenged in the coming months.

 

August restaurant data from TDN2K

On Friday we also received figures from TDn2K’s Black Box Intelligence that showed August same-store restaurant sales rose +1.8%, the best highest since 2015. TDn2K’s data is based on weekly sales from over 30,000 locations representing more than 170 brands and nearly $70 billion in annual sales. More positives for our positions in Chipotle and Del Frisco’s. I’ll tuck this data point away as well as the July and eventual September one to compare them against same-store sales quarterly results for out two restaurant holdings.

 

US Department of Agriculture

The most recent data published on Friday by the US Department of Agriculture showed cow prices were down 13.6% year over year in July, continuing the trend of double-digit year over year declines that began this past May. I see this as confirmation of deflationary beef prices that bode well for both margins and EPS gains at both Del Frisco’s and to a lesser extent Chipotle.

Later this week, I’ll look for further confirmation of beef deflation leverage when Darden Restaurants (DRI), the parent of Capitol Grill reports its quarterly earnings.

 

Scaling into Del Frisco’s shares

The net result of these three Friday data points has me adding to our Del Frisco’s Restaurant Group shares at current levels. If our Chipotle shares were lower than our entry point, I’d be doing the same, but they aren’t – if they do fall below the $473 layer, all things being equal I’d look to repeat today’s actions but with CMG shares.

  • We are scaling into shares of Del Frisco’s Restaurant Group (DFRG) following several bullish data points from last week. Our price target for DFRG shares remains $14.
WEEKLY ISSUE: Revisiting Aging of the Population theme and introducing a new position

WEEKLY ISSUE: Revisiting Aging of the Population theme and introducing a new position

Key points inside this issue

  • We are issuing a Buy on and adding shares of AMN Healthcare (AMN) to the Tematica Investing Select List with a price target of $75.

Today we complete the recasting of our 10 investment themes that we’ve undertaken over the last several weeks. That process has led to several new investment positions and today we have a new one as well as we revisit our Aging of the Population investing theme.

Stepping back a few paces, I recognize that we’ve introduced several new positions in as many weeks. Hang tight for a day or two, and I’ll share the logic behind what we’ve been up to, and I suspect you’re going to nod your head as you read it. For now, let’s get to Aging of the Population and that new pick.

 

There Is Just No Fighting Father Time

As we look around us, it’s rather obvious that people are living longer, which in many respects is a good thing, but those extra years have a significant impact on society. As we age our needs and abilities change, and with that so do the services and products that we consume.

According to a National Center for Health Statistics report released in 2016, the average life expectancy in the U.S. stands at 78.8 years on average, with women outlasting men by a few years 81.2 years of age vs. 76.6 years. By 2030, the Administration on Aging (AOA) estimates there will be about 72.1 million people aged 65 or older, more than twice their number in 2000. In 2010, the baby boom generation was between 46 and 64 years old, and that generation is now beginning to enter their 70s.

Over the next 13 years, all of the baby boomers will have moved into the senior generation, resulting in a major structural shift in demographics. From 2010 to 2030, the percent of the population over 65 will increase from 13 percent to 19 percent while the percent of the U.S. population aged 20-64, the primary working years, will decrease from 60 percent to 55 percent. The broadening of the upper age pyramid is poised to significantly impact demands on healthcare, housing and transportation and question the ongoing viability of social service programs like Medicare, Medicaid and Social Security. Ah, yes more fun times to be had in Washington over the next decade.

 

We in the United States are hardly alone in this demographic shift 

Canada, Japan, and most of Europe have an even higher percentage of their populations in the older age brackets. According to population projections from the United Nations published in its 2013 “World Population Ageing” report, the global population aged 65 and older will triple over the next 40 years, from 500 million in 2010 to 1.5 billion by 2050, thus doubling the share of this demographic across the world from 8 percent to 16 percent. There is a shift toward older age brackets in almost every country as people live longer and have fewer children. Digging into the specifics of that UN report one sees that:

  • Roughly 26 percent of Japan’s population is aged 65 or older, and 32.2 percent are expected to be senior citizens there by 2030
  • Germany has 17 million people who are aged 65 and older, and that number is expected to swell to 21 million by 2030.
  • By 2030, there are projected to be nearly 16 million retirees in Italy with 25.5 percent of Italian citizens anticipated to be 65 or older.
  • There are 8.4 million Spaniards age 65 or older, and they comprise 17.6 percent of Spain’s population. Those numbers are estimated to grow to 11.5 million in 2030 when this age group is expected to make up 22 percent of the population.

How does this stack up against what it used to be?

Per historical data from the UN, life expectancy was 65 years in 1950 in the more developed regions, as compared with 42 years in the less developed regions. (Note that the latter number was heavily skewed by higher child-mortality rates.) Between 2010 and 2015, these figures are estimated to be 78 years in the more developed regions and 68 years in the less developed regions. The gap is expected to narrow even further: By 2045 to 2050, life expectancy is projected to reach 83 years in the more developed regions, and 75 years in the less developed regions.

As the life expectancy gap narrowed between developed and less developed regions, the average age expectancy of both groups increased. The number of people 65 and older was 841 million in 2013, four times higher than the 202 million seen in 1950. This population is expected to nearly triple by 2050 when its number is expected to surpass the two billion mark. The proportion of the world’s 65-or-older population is expected to increase to 21 percent in 2050 from just 12 percent in 2013 and 8 percent in 1950.

This living longer is the basis for our Aging of the Population investment theme. It will lead to new products and services that cater to the needs of this increasing “older population ”demographic, but it also means greater demands on savings and investments. Unfortunately, according to a report by the Economic Policy Institute (EPI), the average household aged 56-61 has amassed a retirement nest egg of just $163,000 which equates to an average monthly income of just $681 across a 20-year retirement according to EPI. Worse yet, an estimated 41% of households aged 55-64 have no retirement savings at all and over 20% of married Social Security recipients and 43% of single recipients 65 and over rely on their monthly benefit checks to provide at least 90% of their income.

The big issue facing the nation is the assumption of a 20-year retirement time period when data from the Social Security Administration shows one out of every four 65-year-olds today will live past the age of 90, while one out of 10 will live past 95. It’s no wonder 60% of baby boomers claim they’re more afraid of outliving their savings than actually dying. This is a massive problem across much of the world as rising life expectancies place much greater strains on government managed retirement programs while the percent of the population paying into those programs declines. Payout levels are growing while relative contribution levels are declining.

 

Who will ride the Aging of the Population tailwind?

The bottom line with this massive worldwide demographic shift towards a more senior population is a reallocation of spending and consumption habits. Money that was once dedicated to supporting a young and growing family will increasingly shift toward spending that serves an aging population. Pronounced spending shifts such as these can have a dramatic impact and in this case, the snowballing of the “older population” likely means an even greater compounding effect will be had.

How big will this overall aging lifestyle-spending shift be?

According to research firm A.T. Kearny, worldwide spending (remember the aging of the population is global) by mature consumers is forecasted to reach $15 trillion annually by 2020. That’s a large opportunity for industries that are meeting the particular needs of consumers age 65 and older and with the aging population only expected to grow further between 2020 and 2030, spending by this cohort will grow substantially in the coming decade-plus. It also likely means that more companies will tailor products and services to meet this opportunity.

There are a number of industries that will likely be beneficiaries. Some are obvious — healthcare, pharmaceuticals and medical technology are what come to mind for most people and certainly receive significant weighting in the Aging of the Population index. Others are less obvious but just as important and likely to feel the same thematic impact. We’re talking about:

  • A shift in demand for different types of housing as seniors give up on the homestead and move into easier to maintain condos and townhouses.
  • An even greater focus on online retailers that will deliver purchases directly to the home, rather than having to go out and carry purchases from the store to the car and then into the home. Also driving this shift will be younger children making purchases for their aging parents and having them shipped directly to their home.
  • Financial Services stands right in the middle of the storm as the wealthiest generation in history starts to draw down on assets to fund retirement rather than accumulate more and more each year.
  • Fountain of Youth goods and services will be in even higher demand as Baby Boomers have shown they are not likely to let go of their youth easily.
  • And finally, technology and services that will help maintain independence— we’re talking about robots, digital assistants, monitoring equipment and even things such as the autonomous car.

 

Enter AMN Healthcare

One of the key aspects of our Aging of the Population investing theme centers on the aging of the baby-boomer generation and the corresponding needs and pain points. Looking at the domestic population, no matter the data or the source, it all points to the same thing — more people over age 65 than ever before.

Now for the real whammy: According to the National Council on Aging, 80% of older adults have at least one chronic condition, and 68% have at least two. Combined with the underlying demographic shift, this will place far greater demands on the domestic health care system in the coming years.

While many tend to focus on any one of the various aspects of the health care systems, the combination of the aging population and chronic conditions is a demand driver for nurses. But here’s the problem: The U.S. has been dealing with nursing constraints over the last few decades. Viewed against the aging population and an aging nursing workforce with limited capacity at nursing schools, that constraint is looking more and more like an outright shortage.

  • According to the Bureau of Labor Statistics’ Employment Projections 2014-2024, Registered Nursing (RN) is listed among the top occupations in terms of job growth through 2024. The RN workforce is expected to grow from 2.7 million in 2014 to 3.2 million in 2024, an increase of 439,300 or 16%. The Bureau also projects the need for 649,100 replacement nurses in the workforce bringing the total number of job openings for nurses due to growth and replacements to 1.09 million by 2024.
  • By 2025, the shortfall is expected to be “more than twice as large as any nurse shortage experienced since the introduction of Medicare and Medicaid in the mid- 1960s,” according to Vanderbilt University nursing researchers.
  • Roughly a million registered nurses (RNs) are older than 50, according to the American Nurses Association. What this means is roughly one-third of the current nursing workforce will reach retirement age in the next 10 to 15 years. Some estimates place the total number of nurses expected to exit the position as high as 700,000 over the next eight years.

 

Where does this leave us?

The nursing shortage that we’ve identified as part of our Aging of the Population theme looks to benefit from both a significant increase in demand but also a scarce-resource tailwind as well. That combined tailwind has been extremely beneficial to the shares of AMN Healthcare Services (AMN), a healthcare workforce and staffing solutions company with an emphasis on the nursing industry. Tematica Investing subscribers should be familiar with the company given the AMN shares resided on the Tematica Investing Select List from August 2016 until May 2017, when we were stopped out of the position.

Staffing Industry Analysts (SIA) estimates that the segments of the target market in which AMN primarily operate have an aggregate 2018 estimated market size of $17 billion, of which travel nurse, per diem nurse, locum tenens and allied healthcare comprise $5.4 billion, $3.7 billion, $3.7 billion and $4.2 billion, respectively. Based on the consensus revenue forecast of $2.15 billion this year for AMN, the company has approximately 12.5% market share across those aggregate markets. And as the population continues ages, those figures will continue to rise, giving the opportunity for AMN to place not only nurses but assist in other physician leadership searches as part of its Managed Service Program offering. Generally speaking, AMN’s revenue and profit stream reflect the number of healthcare professionals it has placed on assignment multiplied by the average bill rate. More than likely as the shortage continues, the company’s average bill rate is poised to move higher making for nice incremental margin gains.

The question to be asked now is if there is sufficient upside in AMN shares to have them rejoin the Select List at current levels?

Looking at the discrepancy in the monthly JOLTS reports between the number of healthcare job openings vs. the number of filled healthcare jobs, we know the healthcare workers shortage pain point remains. Over the 12 months ending June 2018, per the monthly JOLTS report, the ratio of healthcare and social assistance job openings to hires has remained near 1.9x.  The analysis of the nursing shortage over the last few pages also tells us that it’s not going to be solved in one year’s time let alone in the coming few years, which means the sting of that pain point of that shortage will be felt some time to come. This will likely translate into continued top and bottom line growth for AMN as its revenue model capitalizes on that pain point. Should we see an increase in the number of new nurses coming into the market, this will likely augment AMN’s revenue stream as it leverages its market position and places a percentage of those new entrants.

Over the 2012-2020E period, AMN is expected to grow its bottom line at roughly a 17% compound annual growth rate (CAGR). As the nursing shortage pain point has intensified over the last several years, AMN shares have peaked at more than 21x earnings and bottomed out at an average P/E multiple at 14x. Applying these historic multiples implies upside from current levels to $72, with downside risk to $48. With more Baby Boomers turning 70 years old every day, odds are those historic PE multiples, particularly to the downside, will move higher in the coming years as the severity of the nursing and aging pain point is more fully recognized. While we could stretch the P/E multiple to warrant a $75-$85 price target (and downside to just under the current share price), a better way to view it would be to place a discounted P/E placed on expected EPS of $4.00 in 2020, which gives us a $75 price target.

  • We are issuing a Buy on and adding shares of AMN Healthcare (AMN) to the Tematica Investing Select List with a price target of $75.

 

Companies riding the Aging of the Population investing theme

  • A V Homes (AVHI)
  • Amedisys Inc. (AMED)
  • ANI Pharmaceuticals (ANIP)
  • Athene Holding (ATH)
  • Brookdale Senior Living (BKD)
  • Caretrust (CTRE)
  • Charles Schwab (SCHW)
  • Cross Country Healthcare (CCRN)
  • CVS Health (CVS)
  • Ensign Group (ENSG)
  • Estee Lauder (EL)
  • Express Scripts (ESRX)
  • Lab Corp. (LH)
  • Lindblad Expeditions (LIND)
  • Omega Healthcare (OHI)
  • Nu Skin (NUS)
  • Physicians Services (DOC)
  • Quest Diagnostics (DGX)
  • Service Corp (SCI)
  • Spok Holdings (SPOK)
  • StoneMor Partners (STON) – basically the same and AMN
  • Wright Medical Group (WMGI)
  • Zimmer Biomet Holdings (ZBH)
  • Zoetis (ZTS)

 

Special Alert – Exiting shares of USA Technologies (USAT)

Special Alert – Exiting shares of USA Technologies (USAT)

Key point inside this special alert

  • We are issuing a Sell and removing USA Technology (USAT) shares from the Tematica Investing Select List. As we close out the position, we’d note a gain of 17% was had with the shares.

This morning shares of Digital Infrastructure company USA Technologies are getting hammered, yes hammered, on the news the company it is conducting an internal investigation into the accounting of certain of its present and past contractual arrangements and financial reporting controls. As a result, the company said it would not file its Form 10-K annual report with the SEC by the Sept. 13 deadline, but it will file a Form 12b-25 notification of late filing, to provide it with a 15-day extension.

As the trite saying goes, I’ve seen this movie before and there tend to be at least two issues at work. The first is management credibility, which has clearly been called into question. The second is the actual findings of the investigation, which could range from a restatement of past financials and re-jiggered expectation to a management change. All of those are likely to add an extra layer of uncertainty into the equation, which likely means the shares will be rangebound for a protracted period of time.

I’d rather leave with our profits intact and focus on the opportunity to be had with the several new thematic additions we’ve made over the last few weeks.

  • We are issuing a Sell and removing USA Technology (USAT) shares from the Tematica Investing Select List. As we close out the position, we’d note a gain of 17% was had with the shares.
Safety & Security – A robust tailwind that is more than just cyber security

Safety & Security – A robust tailwind that is more than just cyber security

KEY POINTS FROM THIS ALERT:

  • We are issuing a Buy on Axon Enterprises (AAXN) and adding them to the Tematica Investing Select List with a $90 price target.

 

The right to defend yourself and your property apply in today’s increasingly connected world, just as it did more than 200 years ago. While the public debate and much of the media coverage focus on the Second Amendment and the right to keep and bear arms, the threats we face today are changing, just as the way we interact with people, data and content are changing. As individuals, companies and countries, we must be increasingly on guard and behaviors need to shift away from reactionary defense towards always prepared and secure, much the way we’ve seen with homeland security and traditional national defense.

Tematica’s Safety & Security investing theme looks to tap into evolving needs across individual, cyber, corporate and homeland security. In turn, the Safety & Security Index targets companies that offer products and services across that range, from corporate security and monitoring solutions, to personal firearms arms and home-security, to individual, corporate and national cyber security to defense spending.

It wasn’t too long ago that the WannaCry and Petya cyber-attacks dominated the headlines. Over the past few years, cyber  security we have seen a significant increase in the number of cyber-attacks plaguing individuals, corporations and other institutions across the globe. In our view, there is little cybersecurity is a growth market as individuals, companies and other institutions look to ward off future attacks, shore up their existing cyber defenses, assess attack and intrusion analytics and become far more secure.

We see this reflected in the forecasts calling for cybercrime to cost $6 trillion annually by 2021, up from $3 trillion in 2015 according to Cybersecurity Ventures. From a somewhat different perspective, in the five years ending in 2021, worldwide spending on cyber security software, services, and hardware services is expected “to eclipse $1 trillion”. As one might expect one of the fastest growing tech categories through 2021 will be managed security services with CAGR 14.7%, according to International Data Corporation.

Here’s the thing, as crucial as cybersecurity will be in the coming years, it is still just one aspect of the far larger amount of spending that occurs each and every year to keep our nation, businesses, homes and families safe.

Case in point, total global cyber security spending represented roughly 23 percent of the $522 billion 2017 U.S. defense budget. Candidate Trump pledged to rebuild the US military and President Trump is looking to boost defense spending to $716 billion in 2019, a 10 percent increase from the amounts set for the Department of Defense in the continuing resolutions levels. Over the 10-year budget window, funding for the Department of Defense is $1 trillion above projections from the previous administration. In addition to big-ticket items like military aircraft, ships and other marine vessels, the budget includes national security spending, cyber defense, weapons procurement, as well as research and procurement.

Keep in mind that is just at the federal level. At the local and state level, we are seeing shifts in spending by law enforcement to more Disruptive Innovator led solutions such as body cameras and tasers to name a few. According to QY Market, the global market for body cameras is expected to reach about $1.5 billion by 2021 from $259.5 million in 2016. Forces driving the growth in the body camera market include the growing demand for monitoring police conduct as well as transparency in evidence collection and handling. The non-lethal weapons market comprised of military and law enforcement is estimated to reach $8.4 billion by 2020, a CAGR of 8.2 percent from 2015 to 2020.

Outside the US, rising global tensions have led to increasing demand for defense and military products in the Middle East, Eastern Europe, North Korea, the Far East and South China Seas. This is, in turn, instigating increased defense spending globally, especially in the United Arab Emirates (UAE), Saudi Arabia, South Korea, Japan, India, China, Russia. For example, the Middle Eastern Homeland Security market is slated to grow at a CAGR of 15.5 percent to achieve $17.05 billion by 2021, up from $7.19 billion in 2015, driven by government initiatives to create a smart and secure environment amidst high terrorist activities in the region.

 

Protections Gets Personal

With the media’s emphasis on cyber security (just Google “security” and see what comes up), attention is lost on other aspects of individual or personal security. The global home security solutions market, (which includes video surveillance, electronic locks, alarms, access control, sensors, detectors and corresponding services) is predicted to reach $30.3 billion by 2022, up from $8.3 billion in 2014.

The increasing acceptance of video surveillance systems is expected to propel the video surveillance sub-sector in the years to come with demand for IP-based video surveillance expected to increase due to its improved video capturing quality. This growth is not just U.S.-based as the number of monitored alarm systems in Europe is forecast to grow from 8.7 million in 2016 to reach 10.6 million in 2021, according to a new research report by Berg Insight. By comparison, in North America, the number of monitored alarm systems is forecasted to grow from 32.1 million at the end of 2016 to 37.1 million at the end of 2021.

 

THE SAFETY & SECURITY TAILWINDS

As much as the Safety & Security investment theme is demand-driven as people, corporations, governments and other entities spend on protecting and securing themselves, it is one that is ripe for change as industries evolve and in some cases embrace our Digital Lifestyle and Digital Infrastructure themes. Just one case in point, the M&A activity in the defense contracting sector for cyber firms as the “battlefield” increasingly expands into the virtual world.

Another component arises when we look to the Internet of Things (IoT) and the increasing reality that even our own personal possessions could be rendered useless through a cyberattack unleashed by a foreign government or other entity. In 2015 for example, Black Hat hacked a 2014 Jeep Cherokee over the internet and paralyzed it on I-64 forcing Chrysler to recall 1.4 million vehicles. Hackers have found security flaws in smart home connectors that are used to turn up the thermostat, turn on your lights or access your Wi-Fi network through your smart fridge.

It’s this reality that the Tematica Safety & Security investing theme taps into as it covers the full range of companies participating in the security and monitoring of our homes, families, companies and homeland.

 

Axon Enterprise – Not just Taser anymore

Given the wide lens of our Safety & Security theme, there are many companies to consider, but the one we are focusing on is Axon Enterprises, the company formerly known as Taser, of which most of us have heard. Why the name change? Odds are there were several reasons, but the most poignant one is the transformation of the company’s business model from one predicated on conducted electrical weapons (CEW), better known as Tasers, to a more balanced one between those weapons and connected wearable on-officer cameras (Axon), an in-car camera variant (Axon Fleet) and complimentary cloud-based digital evidence management software (Evidence.com). Evidence.com is the company’s data management system, chain-of-custody controls and security protocols that law enforcement agencies use to preserve and protect data from body cameras and in-car video systems.

There are several reasons why we like that transformation. The company now has more diversified business model and one that has aspects of recurring revenue streams that tend to receive more favorable valuation multiples, compared to the 15x-19x earnings at which firearm companies American Outdoor Brands (AOBC; formerly Smith & Wesson), and Sturm, Ruger & Company (RGR) are trading at based on expected 2019 EPS. There is also the replacement cartridge aspect of CEW weapons, which is very similar to ammunition in that continued replenishment is required, which results in an on-going revenue stream. Currently, munitions company Vista Outdoors (VSTO) is trading at 36x expected 2019 earnings.

As we touched on above, the outlook for the domestic body camera market looks vibrant over the next several years, and that augurs for growth for corresponding digital records management solutions.  Easing Axon’s entrance into this market and the transformation in its business model is its existing relationship with more than 20,000 public safety agencies worldwide that span law enforcement, corrections, and military forces as well as private security personnel and in the case of its CEWs, private individuals. At the end of 2017, 38 of the top 50 metropolitan areas in the U.S. were on the Axon network.

Strengthening Axon’s position in the body camera and digital storage markets was its May 2018 acquisition of VIEVU, a body camera and cloud-based evidence management system competitor. That acquisition expanded Axon’s customer base to include among others the New York City Police Department, the Miami-Dade Police Department, the Phoenix Police Department, the Oakland Police Department and the Aurora, CO Police Department as well as Mexico City and Mexico’s federal police. Given the timing of the acquisition, it had a modest impact on the June 2018 quarter, but should be a greater contributor over the coming quarters from a revenue and cost synergy perspective as Axon integrates its customers and platforms.

In June, Axon reached a partnership with Milestone Systems, a leading open platform IP video management software provider, that brings data from more than 6,000 models of cameras from 150 manufacturers, including CCTV footage, into Evidence.com. As with other data stored in Evidence.com, this new data will be trackable, easily shareable, and redactable.

Also, in the first half of 2018, Axon inked a strategic partnership with drone manufacturer DJI to sell its video-capable drones directly to police officers through a new Axon Air program. More than 900 American public safety agencies use drones to improve officer safety, support tactical actions, reconstruct traffic collisions, support public safety at large events and perform search-and-rescue missions. Axon’s strategy is to leverage its police and law enforcement customer base to sell the DJI drones bundled with access to Axon’s connected data network and Evidence.com services.

Exiting the June 2018 quarter, the company’s install base included 450,000 Tasers in the U.S, an active camera count of more than 300,000 and a growing subscription business at Evidence.com. While the bulk of the company’s business is inside the U.S., roughly 20% of its CEW business is international with fresh opportunities in both the UK and Italy. Based on the company’s current market share as well as recent moves to expand its reach with its VIEVU acquisition and partnership with DJI, Axon is well positioned to ride the expanding tailwind that is the body camera and digital support market. Exiting 2017 the global body-worn camera shipment market was 1.05 million units, up from 0.17 million, and is forecasted to reach 1.59 million units this year and more than 5.6 million units in 2021. While the US is the largest body camera market today, the adoption of body-worn cameras by the police officers in Europe region is growing and that is expected to be followed by Asia-Pacific in the coming years.

Following the completion of a 4 million share equity offering this past May that raised roughly $245 million in capital, Axon’s balance sheet had net cash of $311.6 million ($5.35 per share). Combined with its positive cash flow from operations, the company has ample funding to pursue other strategic initiatives, including additional acquisitions and alliances, to expand its business in both the domestic and international markets. Per the company, it sees its total addressable market in the near term as $7.7 billion, which breaks down to $1.5 billion in TASER weapons, $0.7 billion in hardware sensors/body cameras and $5.5 billion in cloud-based public safety software. Even if we were to annualize Axon’s June 2018 revenue, which would clock in at just under $400 million vs. the $344 million achieved in 2017, there are ample share gains to be had in this expanding market that are expected to drive its EPS to $1.07 in 2020, up from $0.52 this year and $0.27 in 2017.

Inherent in those EPS expectations is for its Software and Sensors business segment to turn from one generating operating losses to profits. In the first half of 2018 quarter, all of Axon’s operating profits were derived from its Taser business while Software and Sensors reported an operating loss of $16.9 million on $76 million in revenue. In comparing that time period with the first half of 2017, we see the Software and Services business made considerable ground in reducing the drag on the company’s overall profits as segment revenue continued to climb. For the first half of 2017, Axon’s Software and Sensor business reported an operating loss of $31.6 million on revenue of $48.2 million. Crunching the year over year change in operating losses vs. revenues tells us the Software and Sensor business achieved incremental operating margins of 52.5% in the first half of 2018, a very positive sign that says for every incremental revenue dollar, the company was earning $0.52 in operating profit. In other words, the likelihood that Software and Sensors becomes a profit generator in the coming quarters is rather high. Our analysis suggests the break-even level for the business is around $220-240 million in annual revenue vs. the annualized first half of 2018 level near $153.6 million and $96.4 million for the first half of 2017.

If there were one bone to pick with Axon, it would be the stock’s current valuation, which sits at a P/E ratio of more than 65x expected 2020 EPS of $1.07 and an eye-popping 102x consensus forecasted $0.69 in 2019. When faced with such robust valuations, we recognize the danger of solely focusing on a stock’ P/E ratio if one does not account for the underlying EPS growth. Hence our usage of the price-earnings to growth ratio for Amazon (AMZN) and here with Axon shares. Over the 2017-2020 period, Axon is forecasted to grow its EPS at a compound annual growth rate (CAGR) of 157%. Granted this slows to roughly 143% for the 2018-2020 time frame from 160% over the 2017-2019 period, but even if we utilize that slower growth rate it means Axon shares are trading at a steep discount on PEG basis using either 2019 or 2020 EPS expectations.

While it can be tempting to get all “pie in the sky” with that valuation potential, it does point to upside in the shares near $100-$110 if Axon delivers on the consensus 2019 EPS forecast with a PEG multiple of just 1.0x, we have to consider a potential profitability timing slip with Axon’s Software and Sensor business. This could impact EPS expectations, so to be conservative we’re haircutting both the company’s EPS CAGR and expected EPS in 2019 and 2020.

Applying either . . .

  • An EPS CAGR rate of 140% on potential 2019 EPS of $0.65 with a PEG ratio of 1.0 or
  • A 0.9 PEG ratio to an EPS CAGR of 145% on potential 2019 EPS of $0.69

. . . and both deliver a price target of $90. If Axon’s can hit the expected growth trajectory through 2020, a similar analysis implies upside to more than $130.

Yes we know, quite the math-Olympics in that last paragraph, but those efforts reveal upside of at least 28% from current levels over the coming year. On the downside, AAXN shares have bottomed out at an average of 58.5x forward earnings over the 2016-2018 period, which suggests downside to just over $60. That’s potential downside of 14%, which means net upside vs. downside in the shares over the coming year, on a conservative basis is 14%.

Recognizing the strong likelihood for continued adoption of its Software and Services business that will drive its business transformation, we are adding shares of Axon Enterprises (AAXN) to the Tematica Investing Select List with a $90 price target over the 15 months. Based on the company’s ability to wring profitability out of this business segment, we’ll look to revise that target in the coming months. Should AAXN shares come under pressure, all things being equal we would look to scale into the shares closer to $60.

As we monitor the position, we’ll continue to watch the further adoption of body cameras and Evidence.com by existing customers as well as new ones. We’ll also be keeping tabs on the patent litigation against Axon from competitor Digital Ally (DGLY), which has the date of January 16, 2019 for its Final Pretrial Conference. With a market cap of $20.4 million and roughly $11 million in net cash following a recent $10 million equity infusion, one way for Axon to remove this concern would be to utilize its balance sheet in a move that would further shore up its competitive position.

  • We are issuing a Buy on Axon Enterprises (AAXN) and adding them to the Tematica Investing Select List with a $90 price target.

 

 

Companies riding the Safety & Security tailwind:

  • American Outdoor Brands (AOBC)
  • Carbonite (CARB)
  • Check Point Software (CHKP)
  • Cisco Systems (CSCO)
  • F5 Networks (FFIV)
  • Fortinet (FTNT)
  • General Dynamics (GD)
  • Imperva (IMPV)
  • Lockheed Martin (LMT)
  • Northrop Grumman (NOC)
  • OSI Systems (OSIS)
  • Palo Alto Networks (PANW)
  • Proofpoint (PFPT)
  • Qualys (QLYS)
  • Raytheon (RTN)
  • Science Applications International Corp. (SAIC)
  • Sturm, Ruger & Co. (RGR)
  • Verisign (VRSN)
  • Vista Outdoor (VSTO)

 

UPDATE: Boosting our Costco Warehouse price target… again

UPDATE: Boosting our Costco Warehouse price target… again

Key points inside this issue:

  • We are boosting our price target on Costco Wholesale (COST) shares to $250 from $230.

 

Last Thursday night, Costco Wholesale (COST) once again shared blow away same-store-sales results this time for the month of August, which reflects the Middle-Class Squeeze tailwind as well as Costco’s positioning to ride our Digital Lifestyle investing theme as well. All told, sales for the period rose 12.2% to $11.0 billion, which capped the company’s August quarter with $43.4 billion, a 5.0% increase vs. the year-ago quarter, which was rather impressive given the year-ago quarter contained an extra week compared to this year. On a same-store sales basis, and stripping out foreign exchange and gas prices, Costco’s overall August sales climbed 8.0% year over year and 7.2% year over for the quarter.

Also impressive was the continued gains, both during August and the overall August quarter, for Costco’s e-commerce business, which was up 24.5% and more than 26%, respectively, when excluding the impact of gas and foreign currency.

And lest you think I forgot, Costco exited August with 762 active warehouse locations, up from 741 exiting a year ago, which bodes and 750 exiting its May 2018 quarter. The greater number of warehouse locations implies greater membership fees and higher membership fee income, which is not only a key differentiator vs. other retailers but also a prime driver of Costco’s EPS.

With consumers feeling the pinch of higher debt levels and inflation, with wage growth only now starting to move, I continue to see Costco extremely well positioned as we move into the seasonally strong shopping season that is the last four months of the year. As the company continues to ride these two thematic tailwinds, I see further upside ahead in the coming months and am boosting our COST price target to $250 from $230. A portion of that increase reflects the move up in EPS expectations over the last 90 days due to the robust same-store sales reports and increases in open warehouse locations, with the balance tied to multiple expansion as Costco continues to shake out Amazon concerns and deliver results that are the envy of the vast majority of brick & mortar retailers. Even as this price target is boosted, we would not chase COST shares at the current share price, but rather sit back and enjoy the ride.

  • We are boosting our price target on Costco Wholesale (COST) shares to $250 from $230.